Simplifying Fundraising Compliance: Key Rules for Privately Held Companies

For privately held companies, raising capital is a crucial step towards achieving growth, expanding operations, and meeting long-term goals. However, this process can be fraught with challenges and regulatory complexities. In this article, we delve into the critical factors influencing a privately held company’s fundraising efforts and the guidelines for compensating individuals who assist in these endeavors. 

Factors Influencing Fundraising for Privately Held Companies 

Regulatory Adherence: Fundraising activities for privately held companies are governed by stringent regulatory frameworks aimed at protecting investors and ensuring fair practices. Adhering to securities laws and regulations is essential, and these can vary based on the investor types and exemptions used. 

Accredited vs. Non-Accredited Investors: Differentiating between accredited and non-accredited investors is pivotal in planning fundraising strategies. Accredited investors meet specific financial criteria, offering more flexible fundraising opportunities. In contrast, raising funds from non-accredited investors often necessitates additional compliance and disclosure measures. 

Valuation and Appeal: A company’s valuation is a cornerstone of its fundraising efforts. An accurate and justifiable valuation not only attracts potential investors but also influences the equity offered in return for their investment. 

Investor Trust: Building investor confidence is essential for successful fundraising. Companies must provide clear and accurate information about their financial health, market position, growth prospects, and risk management to gain the trust of potential investors. 

Networking: A broad network and strong connections in the financial industry can significantly impact the success of fundraising efforts. Companies with established relationships may find it easier to secure investments from seasoned investors and financial institutions. 

Guidelines for Compensating Fundraising Assistants 

Regulation D, Rules 506(b) and 506(c): These are prominent exemptions under Regulation D that allow privately held companies to raise capital from accredited investors without needing to register the securities with the Securities and Exchange Commission (SEC). 

Intermediary Compensation: Under Rule 506(b), companies can hire third-party intermediaries, like broker-dealers or fundraising consultants, to aid in fundraising. These intermediaries can receive fees or commissions for their services. 

Fiduciary Duties: Intermediaries representing the company have fiduciary duties to potential investors. They must act in the best interests of both the company and the investors, ensuring accurate disclosure of all relevant information. 

Due Diligence: Companies must thoroughly vet any intermediaries before engagement, ensuring they are reputable, licensed (if necessary), and compliant with securities laws. 

General Solicitation under Rule 506(c): This rule allows companies to engage in general solicitation and advertising for fundraising, provided all investors are verified as accredited. Non-accredited investors are not permitted under this exemption. 

Conclusion 

Raising capital through fundraising is a complex yet crucial endeavor for privately held companies. It necessitates a deep understanding of securities regulations, compliance requirements, and investor relations. By adhering to these rules and ensuring compliance, companies can protect their interests and those of their investors. 

When compensating individuals to aid in fundraising, selecting reputable professionals who prioritize investor protection and regulatory adherence is vital. Thorough due diligence and a commitment to fiduciary responsibilities are essential to maintaining investor trust and safeguarding the company’s reputation. 

Navigating the fundraising landscape can be intricate. We recommend consulting experienced securities attorneys and financial experts to ensure a successful and legally sound fundraising process for your privately held company.